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Feb 1, 2009 (Vol. 29, No. 3)

GEN’s Annual Wall Street Roundup

Experts Agree that Adaptability Is the Key to Long-Term Survival, Especially in Difficult Times

  • GEN: What are your predictions in light of the new political regime in relation to follow-on biologics, stem cell research, and healthcare in general?

  • Conway: Ultimately, politics will have little to do with the industry's future. Greater forces are at work, and the numbers would seem to bear this conclusion out.

    As reported by BIO, of the 370 or so public biotech companies, more than one-quarter have less than six months’ cash on hand and 40% have less than 12 months’ cash. Without a dramatic near-term turn in the markets, many of these companies are going to find themselves with limited degrees of freedom. Pragmatic companies are likely being proactive in accelerating discussions with potential acquirors. The shakeout is likely to be as pronounced, if not more so, in the private sector. We believe that there will be significant portfolio prioritizing and pruning, with venture investors ready to jettison all but the best of the lot. And this may be the optimistic scenario.

    Masterson: Follow-on biologics are not generics. It is impossible to copy biologics perfectly, and at best, they are similar, hence in Europe they are called biosimilars. The FDA has handled only extremely small biologics like human-made insulin and human growth hormone as if they were conventional generics. They have barred other follow-on biologics from entering the market. This may change, but in the interest of safety and continued innovation, Congress must move forward with care.

    Follow-on biologics must have their own distinct names because they could cause unexpected reactions. A biologic can combine several patents, one on the giant molecule itself and numerous others on the process for creating that molecule. Process patents are highly susceptible to challenge in court. Data exclusivity becomes very important for biologics.

    President Obama and Democratic leaders have made the repealing of the Bush administration restrictions on embryonic stem cell research a priority. They have yet to determine if Obama should quickly put his stamp on the issue by way of presidential directive or if Congress should write a permanent policy into statute.

    The debate is not academic. Democrats who oppose abortion say that such a legislative fight holds the potential to get the year off to a difficult beginning, even though the outcome is certain, given solid majorities in both the House and the Senate for expanded embryonic stem cell research.

    Prevention will get a boost from drug makers and regulators in 2009. Pharmaceutical and biotechnology companies that can focus on preventive vaccines and immunizations will be able to capitalize on these public health trends. Pressure to spend more government funding on prevention could reduce availability of dollars for treating diseases.

    During 2009, the health industry may prove to be a source of profitable growth during an economic malaise. As new players continue to enter the healthcare market and new technologies develop, the next frontier in healthcare could be hidden from view. In addition, heightened focus by regulators will need to be monitored carefully, as reducing healthcare costs are viewed as a way to stimulate the economy.

    Mehta: Perpetual monopoly is incompatible with intellectual property rights.  As tempting as such notions of perpetual monopoly are, which drive some industry managers’ short-sighted actions, biosimilars must become an integral part of the industry’s offerings—as is illustrated by the plans by Merck (MRK), Lilly (LLY), and other global pharma (likely to be joined by some of the mature biotech companies).  All stakeholders have learned a great deal from the small molecule generics journey. 

    The only new factor is the need to characterize a biological when made at different manufacturing plants. Rapid progress on this front is under way, especially when one realizes that patented new biologics are usually made at multiple plants and the essential skills are transferrable, and increasingly, not patented. 

    In short, biosimilars or follow-on biologics for the first-generation biologics are likely to be widely used around the world by 2014 when the key patents expire, and most of the key monoclonal antibody patents expire around 2019.

    Stem cell and such other next-frontier science should also advance noticeably over the next decade, with first-generation products nearing the market, if not already on the market. Here again, we should watch active R&D initiatives from around the world and not just from the industrialized nations. This is the journey for this century, not just this generation, and these innovations are poised to transform the way we live—not just the way medicine is practiced.

    In the near term, the healthcare system risks falling victim to the bigger challenge of the turmoil in the financial industry, as many experts fear that there simply are not enough resources to do both. However, the Obama healthcare team certainly has the support and the goodwill to advance healthcare reform in parallel with other serious challenges we face, and we should be prepared for these fundamental changes sooner rather than later. 

    From evidence-based reimbursement to ensuring healthcare for everyone means that our industry must redouble its efforts to ensure that access to its products is available to all patients who need them, and it must be prepared to support the pricing versus the value that its products add. 

    These challenges of uniform access to cost-effective products and smarter development of the new science are the two fundamental challenges, and therefore, the two key opportunities for managements and investors alike.

  • Click Image To Enlarge +
    Jason Napodano

    Napodano: An issue that biotech investors should be aware of in 2009 is the recent victory and appointment of Rep. Henry Waxman (D-CA) as Chairman of the Energy and Commerce Committee. Waxman’s taking over the leadership position on the Energy and Commerce Committee has potential big implications for the healthcare industry. The Hatch-Waxman bill put into law in 1984 essentially created the generic drug industry as we know it today.

    Over the past 20-plus years Waxman has argued aggressively for cheaper drug pricing and nationalized healthcare. Both would be a significant negative headwind for many companies in our universe.

    Biotechnology companies now seem squarely in Waxman’s crosshairs with his aggressive push for follow-on biologics. His argument for zero years of patent exclusivity for new biologic applications seems absurd and it has little chance of passing, but it does seem likely that we are heading toward a generic biologic industry much like the generic small molecule industry Waxman helped create back in 1984.

    We’ll leave the merits of nationalized healthcare or Waxman’s voting record to Washington, but it is clear that mandating cheaper drug prices for Medicare Part-D and allowing follow-on biologics in as little as zero years after approval is a negative for biotechnology stocks. Additionally, expanding government-run insurance programs with big subsidies, all the while limiting the ability for private insurance from small business and citizens is also a significant headwind for the industry. The money needs to come from somewhere, be it higher taxes, lower prices, or a combination of both.

  • Raynovich: In my recent Point of View article in the January 1, 2009 GEN, I commented on the political backdrop for healthcare. Follow- on biologics  are coming, but it is a longer-term issue for selected companies and may be an investment opportunity for niche companies focused in this area partnered with larger pharmaceutical companies. National healthcare will be a focus; also expect proposals to try to find money in the 20% share of the insurance companies’ take. The Dems are likely to be tougher on blockbuster drug pricing and big pharma because that is where government spending looms large. The Medicare Drug benefit cost $47.6 billion in 2007. Overall, the political environment should favor biotech, as the NIH’s $28 billion research budget should be expanded with new champions (Eric Lander and Harold Varmus), and stem cell research controls are lessened.

    Sullivan: With key Washington leaders marching in lockstep toward legislative reform that aims to make healthcare more available and affordable, we expect that healthcare will grow in terms of its share of the U.S. economy in 2009 and 2010.

    Regarding stem cells, it is no secret that the Obama administration will have a more constructive view of such research than its predecessor. As a result, we expect that U.S. disease-state researchers will hurry to integrate stem cell research into their work. Finally, with the legislative father of the generic drug industry, Waxman, holding a much more powerful role in today’s Washington, we expect that follow-on biologics will have a more straightforward path to commercialization.

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